Your £250bn needed to rebuild Britain

In practice, developers tend to sell on the right to receive the Government’s future payments to investors, in order to recoup their capital outlay and provide financing for the next project. Before the credit crisis, those investors would typically have been banks, but infrastructure funds have come increasingly to the fore. This reflects the balance sheet constraints in the banking sector as well as the need for huge infrastructure investment in the UK — and many other economies.

The appeal for investors in such projects is a regular income from this revenue stream — often inflation-proofed, since many contracts stipulate index-linked fees — which is effectively guaranteed by the Government. Returns should be less volatile than with equities or even bonds. And they won’t usually be economically sensitive — a hospital or school, say, is used whatever the prevailing economic winds.

“Our clients are looking for an alternative to equities and corporate or government bonds,” adds Mr Hills. “They want something that produces consistent returns that aren’t vulnerable to the economic cycle — infrastructure appears to tick all these boxes.”

Aren’t there any risks at all?

There are several. One big worry is political risk. The Government is attracted to this funding model for infrastructure because the costs don’t show up in the public finances — were it to borrow the money to do the building itself, they would. But with Britain’s borrowing costs currently at almost zero, paying the private sector to deliver these projects is a more expensive option. That may eventually force the Government to crack down on costs — even to seek to renegotiate contracts already agreed.

Also, the index-linked nature of infrastructure contracts means that when inflation falls — as it finally seems to be doing — the dividend income produced by funds may come down, too. Capital growth could also suffer. Funds calculate the value of their contracts on a discounted cashflow basis — the value of the cash to be generated discounted back to today’s value, so that as lower inflation takes its toll on future revenues, valuations will have to be adjusted downwards.

Nor should day-to-day risk be ignored. Contracts can and do go wrong, with cost-overruns and operational issues having the potential to drag down returns.

What are my options?

Broadly speaking, you’ve got a choice between investment trusts and open-ended funds — there are around 10 of each specialising in infrastructure.

Investment trusts offer first-hand exposure to projects by investing directly in contracts. Open-ended funds are more likely to simply be investors in the stock of infrastructure sector companies. The fact that their size ebbs and flows in line with investor demand makes direct investment more difficult.

Both approaches have upsides and downsides, but investment trusts offer the purest play on infrastructure.

Bear in mind, too, that funds invest differently. Some are solely UK-focused, but the private finance model has been widely adopted overseas — in continental Europe, Canada and Australia, for example — and some funds offer exposure to contracts around the world. That carries additional risks, including exchange rate volatility.

Most closed-end funds concentrate on “availability-based” infrastructure, where the Government makes its payments as long as the asset is available for use (even if, say, hospital’s beds aren’t full). But look out for the proportion of assets held in “demand-based” infrastructure, where returns may be linked to use and are therefore less predictable. A toll road, for example, may carry less traffic when drivers are keeping a close eye on their finances.

How do the numbers look?

Pretty good. Take 3i Infrastructure, which was launched in 2007. Since then, it’s returned around 8 per cent a year on an annualised basis — broadly in line with what the stock market has delivered. Crucially though, the fund has made positive returns in each year — unlike equities, which posted double-digit percentage losses in 2008 and 2009.

One word of warning: shares in all the infrastructure investment trusts trade at a premium to the value of their underlying assets. Investors may prefer to wait to take advantage of the new share issues these trusts hold fairly regularly — often when new contracts become available — rather than buying in the open market.

What do the experts think?

“We prefer funds that invest in physical infrastructure projects to funds that invest in equities because they are less volatile than equities and provide diversification to portfolios,” says Adrian Lowcock, a senior investment adviser at Bestinvest.

He recommends three investment trusts: HICL Infrastructure, the HSBC-run fund that owns assets such as the M80 motorway; International Public Partnerships, with holdings in the UK and beyond; and the John Laing Infrastructure Fund, which has first refusal on 17 projects worth £325 million in the next three years.

Helen Kanolik, a Dorset-based investment adviser, recommends First State Global Listed Infrastructure, an open-ended fund that buys shares in infrastructure companies all over the world, including in developing economies. “In emerging markets, the spending on new infrastructure is so much higher than in the West,” she says.

Not everyone is convinced, though. Patrick Connolly, of the independent financial adviser AWD Chase de Vere, says that none of the funds have been around for long enough — HSBC launched the first vehicle in 2006 — to really prove themselves: “While infrastructure is an interesting asset class, we need to see how the market develops, have a better understanding of how infrastructure performs in the longer-term, its correlation with equity markets and the best way to access it.”